Wednesday, September 14, 2011

Price Action Basics II - Reversals and pullbacks in trends

When the market is in a trend move, it will continue to be in the trend until there is a very strong overshoot or a very clear trendline break. When in a trend, every counter-trend signal is probably a trap and you should ignore it and wait for its failure. Even with the very clear and obvious W at b53 after an obvious buy climax, the risk of failure is high.

An obnoxious overshoot such as b11 or an obvious trendline break such as b74-79 and a successful test of the extreme is necessary before any counter-trend trades are attempted. A failed L2 (b13,15) after a bullish reversal (b11) is a strong confirmation of the reversal and the next buy signal is usually good for a swing.

The W entry is the only counter-trend trade you ever need to take since it usually gives a confirmation and a with trend W1P right after. Every reversal signal in a trend is probably a pullback and nothing more until counter strength is demonstrated. You should look for with-trend signals near the ema or trend line. Ignore signals far away from them (b30,46,52) since they imply possibly another leg in the pullback.


  1. Hi Cad, is b77 some kind of BO PB of the EMA?

  2. TD, yes it could be read as a BP of the ema. Given it was only a few bars from the close, its best to pass it up.